Many people in the market today are first-time home buyers who would not have been able to buy when home prices were higher. Enticed both by lower prices and bank promotions, these eager hopefuls are have taken the signs of deals as the best chance to make their first real estate move.
While all home buyers need help with the short sale process, it’s especially challenging to address the needs and concerns of a first-time home buyer who has decided a short sale is the home for them. Here’s how to get answers to first-time home buyers’ top three questions about short sales.
1. How long does it take for a bank to approve a short sale?
This is the million-dollar question. While it takes an average of three to six months, the timeline – and the process – vary quite a bit from one bank to another.
Short sale approval timelines depend on the bank (some just take longer than others). While each bank has different short sale guidelines, the short sale has to make sense to the bank. The more sense the short sale offer makes to the bank, the faster the approval process.
Here are some things that slow down the process by several weeks or more – these usually involve more people or more factors:
- Multiple liens on the property
- A third party negotiating the short sale on behalf of a seller. Some states allow third parties to do this, for a fee; some states, like Virginia, limit this to real estate licensees, attorneys, and employees of attorneys.
- Private Mortgage Insurance (PMI) on the property
- Additional investors
Action: To make an accurate prediction about the short sale timeline for a particular property, research the bank’s general timelines, the property’s liens, and whether there is PMI before writing the offer.
2. Will the bank make repairs to the property?
The short answer is, probably not.
Here’s why:
- The bank does not have possession of the property and has no authority to make repairs on behalf of the seller.
- Many short-sale sellers do not have the financial means to make repairs.
- Many banks require the short sale to be sold strictly “as-is” and do not allow the seller to pay for any repairs.
Why wouldn’t a bank allow the seller to make repairs? your buyer may ask. A short sale is a sticky situation for a bank, and that the bank wants to avoid potential liability. For example, if the bank allowed the seller to make repairs and the repairs proved to be faulty, the buyer might potentially hold the bank liable, since the seller doesn’t have money (which is how the short-sale situation came about in the first place).
Action: Find out how the bank and the seller feel about making possible repairs. A short-sale buyer needs to understand that the home will most likely be sold strictly “as-is” and all repairs will be at their expense.
3. How do other types of debt affect the short sale outcome?
Many short-sale sellers are more than just “house-poor.” Many have additional debts that place a cloud on title. These include tax liens – income and property, medical liens, mechanic’s liens, and child support judgments.
Depending on your state, some creditors can try to collect debt by going to civil court and getting a judgment lien placed on the property against the homeowner. These liens must be cleared before the short sale transaction can be closed.
- Surprisingly, tax liens are probably the easiest to clear off the title. The IRS has several avenues to collect back taxes, and doesn’t want to become a real estate holding company. Removing a tax lien can take up to 120 days, so it is imperative that this process is started well in advance of the short sale.
- Medical liens can usually be negotiated and a payment plan worked out. However, this is a time-consuming process and needs to be started as soon as possible.
- Mechanic’s liens are a little harder to get removed. There is not much recourse for tradespeople and bad debts.
- Child support judgments are also difficult to remove because they usually involve government agencies.
In short, additional debts can tie up the short sale process.
Action: Make sure to ask the listing agent if a preliminary title search has been performed on the property so you can advise your buyer about possible obstacles.
The more information you can offer your first-time home buyer, the more confident they can be about the transaction. The more confident they are about the transaction, the more likely they will see the transaction through to the closing table.
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Legacy Comments
In today’s world of short sales and foreclosures and the perception of it being a ‘buyers market’, every other buyer thinks THIS is the way to get ‘a deal’.
In my experience, as a full time Realtor for 14 years, including these last few difficult ones, this is often NOT the case. Once you walk your buyer through the reality they will often see that they can actually get a better deal, and certainly a more certain and timely one (including repairs), by dealing with motivated home sellers vs. the banks.
For many reasons the short sale and foreclosure process is long, torturous, includes layers of bureacracy before even hitting the decision maker’s desk! One wrong piece of information for instance can mean starting the whole process completely over again.
Until banks have an offer, do an appraisal that comes in low, they will NOT lower their initial asking price, part of what takes so long. Their initial asking price, as I’ve been told, ‘has’ to come in within X amount of the mortgage owed (often more than the actual worth today), so if anything many of these listings come on ‘overpriced’ compared to listings priced by truly realistic and motivated sellers and their Realtors.
I’m not sure of the banks’ motivations, is it that they only want to show a certain amount of loss per quarter, all I know is they make it impossible for a residential home buyer!
I’ve successfully closed a few short sales, on the buyer end, but ONLY for investors. There is absolutely no way the life needs of a real buyer is considered, making them nothing but disappointing and frustrating for the buyer really looking to live in a home.
My experience – if you have an investor who knows what a property really should be worth, can play the game (including that re: appraisals lowering prices) and has the patience to wait it out – great. But forget it for your regular buyer, at least as they are done now.
If anyone has any insight as to why the banks make the short sale and foreclosure process so impossible, from all ends, I would love to hear your thoughts!
One reason why you wait a long time for a reply is that no one person in the department makes the decision. They have a meeting and the people sitting around the table decide. This way no one person is held accountable for the decision since it is a group/department decision. Also banks have normal business hours and are not “on call” 24/7 as realtors are.
With the growing popularity and forecasted increase of short sales 2012, it’s important for potential buyers to be aware of exactly what a short sale entails. For the most part, those who purchase a short sale have proved to be very satisfied with their transaction and the process. A recent survey by HomeGain shows that homeowners who bought a short sale home showed the highest homeowner satisfaction rate of 83% after their purchase. In addition, 100% of those surveyed agreed that price appreciation was the primary reason for their satisfaction. Once a buyer grasps the concept of a short sale, it is clear that the process is well worth it in the end.
As a listing agent for these short sales I have seen the seller come to closing with cash or do a 0% promissory note with their lender(s) to meet the investors demands or PMI demands. Sellers i believe do this after taking into consideration the amount actually being forgiven, the stress release of actually selling the home and the “short sale” doesn’t hurt there credit as a foreclosure would. Lenders will look at that as a positive, too, when they go to reapply for a loan down the road.
Short sales CAN be a buyer’s ticket to some nice upfront equity, but it’s clear that the expectations need to be tempered with the reality of the process. In exchange for that sweet deal, you’re going to have to wait for the process to play out with no guarantee that the bank will approve your offer.
Here in Hawaii, we currently have a moratorium on non-judicial foreclosures (the more plentiful kind here in the Aloha State) with the intent of allowing more homeowners with underwater mortgages to attempt a short sale (or loan modification). It hasn’t necessarily made the process any easier, but it has increased the number of potential deals out there.
Still, I often hear from new buyers that they want to pick up a short sale — and we’re able to provide some fantastic Hawaii short sale deals — but they still need to be clear about the process. Often, we try to move them to another property that better suits their objectives.
The bottom line $$$$ is the only thing the bank is concerned about. This is why so many short sales end up going into foreclosure before an offer is accepted by the bank. The bank can collect on the PMI insurance, write off the loss, and still sell as a foreclosure with no disclosures or liability.
Short sale negotiators charge the buyer a hefty fee since they have to jump thru so many hoops, just to be left empty handed when the bank refuses any offers and forecloses instead.
A buyer has to have time and patience to see this through, and the seller must do all of the paperwork required by the bank dotting each i and crossing each t or the whole package is useless. All parties have to do a lot of work to come to the closing table and if anybody isnt doing their part, then it wont happen.
Nice concise answer Carolyn. It’s wholely dependent on the bank and their goals and objectives.$$$. The only add on I have is that sometimes it takes so long in the short sale negotiation phase that the foreclosure department steps in and brings it to a screeching halt, that officially ends those negotiations.
I’ve heard that the federal bank bailout program is driving the banks preference for foreclosure, because banks can get federal funds to cover the loss on a foreclosure but not a short sale.
That would explain a lot.
I have to disagree about third-party negotiators slowing the process down. I use them primarily because they speed-up the process. No matter how experienced an agent is, they don’t have the expertise of the negotiators that have transacted litterally hundreds of short sales. It’s also rare to find an agent that’s willing to sit on hold for hours three days a week trying to get a hold of lender negotiators or managers. I’ll leave it to the professionals and take a slightly smaller paycheck. It’s better for me, the Sellers, the Buyers, and the Selling Agent.
One important factor that I did not see mentioned is the seller’s true motivation. Often they are milking it out to stay in the property as long as possible and not providing all the information necessary for the banks to approve the short sale.
Short sales are a great option for first time home buyers who are not in a hurry. It takes having the right agent or negotiation team working with the bank to get the offers accepted at the right price. If a home needs work, just be aware that FHA may not be an option for buyers.
Selling Agents (Buyer Agents): In the California market, with so little inventory, you cannot rule out short sales when showing your clients houses. Apart from asking if a preliminary title report has been pulled, find out if the agent is negotiating the short sale and if so, how many short sales have they completed (more than 20 please!) or if they have hired a negotiation team, who is it. The more experts on the team, the better the success rate.
Short sales do close…it just takes time and patience, and practice.
I frequently hear that it is more like a game and if your emotions are in it, your feelings are likely to get hurt. Investors are just making a business decision so when disappoint happens they move on. Home Buyers many times get frustrated and find something else.
Excellent blog for explanation of short sales. Helpful information.
this is a good point. my most recent short sale closing involved an FHA buyer and the the lenders appraiser called for exterior repair and painting. thankfully it wasn’t extensive such as repaint the whole house. As stated above the sellers were in no financial shape to make this repair. the buyers had to undertake the painting of areas where peeling paint was evident at their own expense once the short sale was finally approved.
If FHA is a buyers aonly way to purchase a home be on the lookout for the following red flags for FHA financing.
1) peeling pain on interior or exterior
2) old outdated electrical boxes or boxes manufactured by Federal Pacific that commonly incorporated electrical wiring ( any licensed engineering inspector will point these defects out on a home inspection)
3) obvious presence of aluminum wiring see above (most common in homes built in late 60′s to early 70′s)
4) missing or not secured railings and hand railings where required by building codes (inspector will point out)
5) abandoned and not properly abandoned (with supporting paperwork) underground oil tanks.
6) dead or dying trees in close proximity to the home
these are the most common and buyers need to be prepared to go out of pocket prior to closing on the home in order to close. but there may be others as we all know guidelines are constantly changing and never for the better LOL
The only repair that I’ve seen any lender allow for was a high radon reading which rendered the sale unclosable. they gave a partial credit towards that. so again.. be prepared for additional out of pocket costs prior to closing than would be the case in most resales.
The up side to this is that often times a buyer can purchase a home 5-10% below standard going fair market value prices is they have the patience to endure and stick out the entire process.
Very articulate article information.
In addition, a good selling agent (buyers’ agent) will also perform a preliminary comparable market analysis to determine if the listed price is at or close to market value. The sellers lender will perform a broker Price Opinion (BPO) to allow the bank to identify market value and then evaluate the offer price which should be at market or within 5 to 10% as generally considered acceptable by most lenders.
Its amazing that a few years ago, it took the better part of a year to get a short sale approved but now they go through in half the time. The banks finally realize that they recover more with a short sale than with a foreclosure.
Remember…..We’re in the final year of the 2007 Debt Relief Act that waives the deficiency for primary homes. If the act is not extended, the motivation for most homeowners to do a short sale will go out the window. 2012 is the year of the short sale
From my experience working short sales, the successful ones require the buyer, the seller and the real estate agent or agents to work together as a team. Each party to the transaction has to be fully invested in the outcome of getting the home sold. There must also be open and transparent communication between everyone involved throughout the process. If one person drops the ball on their end, it can stall or even derail the short sale.
Buyers, sellers and real estate agents have to be willing to jump through whatever hoops the bank puts forth and be ready to do this at a moment’s notice. Buyers and sellers also need to understand that the bank insists on time frames for getting paperwork to them but will likely ignore time frames for their own decision-making and closing of the transaction. If you go in knowing that you’ll have to play their game and the rules could change at any time, then you’ll find the experience much less upsetting.
It takes perseverance, patience and flexibility from everyone involved to successfully close a short sale. If buyers, sellers and their Realtor(s) go into it with the attitude that it’s going to happen and they will work together to do whatever it takes to make it happen, chances are you’ll have a successful outcome.
Here in the Pagosa Springs, Colorado market, foreclosures sales are frequent. Our winters require winterization of homes. Frankly, we are now experiencing too many foreclosed homes have been poorly winterized with little or no disclosure (AS IS, WHERE IS). These properties can require large repair dollars from the buyer, as they are discovered after closing. In the case of a first time buyer, that alone could be difficult. A Short Sale has an advantage of the owners living in the property (not winterized). My experience shows home inspections are more efficient & accurate with Short Sale verses Foreclosure scenarios as there is power, water, and heating (gas or propane) already within the property (and not the case with foreclosed properties here). In a Short Sale, first time buyers are not faced with unexpected and costly winterization repair costs; they can gain a good home value for their money.
Some Short Sales are good and more are not. I refuse to do the majority of short sales because the up front answers are not there. A buyer must also understand that he could lose money spent on inspections, turning on utilities and an appraisal if the property doen not close. There is never a real assurance that the property will close….even if you do have an approval in writing from the Lien Holder. The article did not come close to covering all of the potential risks.
I think if the short sale process is entered into with your clients fully understanding the process and possible delays that it can be very rewrding in the end.
My wife and I sold our house last Fall and wrote an offer on a short sale property at the same time. Fully understanding that it is a waiting game we rented a place month to month and stored belongings. We closed four months later and am enjoying our new home and $40,000 in equity!
I just wrote a post on this for my blog this morning before I read this article. Short sales are not for everyone but they are a great deal of the business right now.
The short sale process can be a huge nightmare or it be a great success. It depends on the bank and if the sellers have begun the process with the bank prior to receiving an offer.
I had a short sale that was approved by the bank within a week then closed less than 30 days later. I had one that closed within 60 days the seller owed 500k and we settled at 250k.
If you have a buyer that understands this is going to take time and that he must submit any paperwork the bank requests asap the process can work to your advantage.
Short sales are such a large segment of our market that they cannot be ignored. Education of buyer and seller is very important for a short sale transaction to succeed. Ignorance or, to be kind, lack of knowledge and experience, are death sentences for short sales. Agents need to educate themselves and know how to educate their clients. For instance, without pointing fingers, I can safely say that several of the opinions expressed in this thread are wrong and without basis. I have closed numerous short sales for buyers and sellers. No two were alike. Generalizations will get you in trouble. The only thing that I can say with certainty is that I learned something from each transaction and I am still learning.